What are the risks associated with flipping property?

June 15, 2014 by Karen Hill | Filed Under: Finance

There are two major risks associated with flipping, but both are manageable. They are: (1) too little knowledge; and, (2) too much greed.

You gain knowledge through reading books, talking to mentors, and observing the behavior of successful people. You also need knowledge about yourself, though. Realistically, what are your strengths and weaknesses in terms of personality, time, money, access to credit, sophistication, salesmanship, and energy? What are your goals? Are they achievable with a conservative plan, or must you take huge risks in order to meet your self-imposed deadlines? Are you risk intolerant? If you do not like taking risks, you will never find a television flip that feels comfortable. Do not waste your time with that strategy. Instead, try another type of flip that suits you better.

Greed is an ugly thing because it does not seem like greed at the time. Instead, it feels like self-confidence that you have the “oomph” to pull off something incredible. My advice for beginning flippers: If you think your potential project will be dramatic and impress all your friends with your immense profits, think two or three more times before jumping at it.

To prevent greed from sneaking up on you, set realistic limits in advance and do not stray from them by more than an inch. In other words, if your requirement is to buy a property at 20% less than market value, do not buy one that is priced at 19% less than market value. You will want to, of course. You will say to yourself, “It’s a great house. I can probably sell it for a little bit above market value and still make my same profit.” It is a little bit like going to an auction. If you say in advance you will not pay over $250 for a leather sofa, you will not get sucked into a bidding war and find yourself paying $1,000 for an $800 piece of furniture.

There are plenty of deals out there. Wait for the right one for you.

Finally, always have a Plan B. Your Plan A is the one where you make a lot of money because all the stars are aligned and things work out perfectly. What if nothing works out well? What if everything goes wrong? Can you still sell the property and at least break even? Can you rent it to a tenant for enough money to cover your mortgage payments, insurance, and taxes, and then sell it later? There are several questions, later, devoted to managing surprises. Be sure to read them several times before starting your own flipping career.